Department Order 18-A

Section 7 Other Prohibitions

(4) Contracting out of a job, work or service through an in-house agency
(7) Repeated hiring of employees under an agreement contract of short
duration or under a Service Agreement of short duration with the same or
different contractors, which circumvents the Labor Code provisions on
Security of Tenure.
. Legitimate subcontracting is different from labor-only contracting. The
former is allowed and the latter is prohibited. Section 6: There is LOC where
the contractor/ subcontractor merely recruits, supplies or places workers to
perform a job, work or service for a principal, and the following elements are
present:
a) The contractor or subcontractor does not have substantial capital or
investment to actually perform the job, work or service under its own account
and responsibility; and
b) The employees recruited, supplied or placed by such contractor or
subcontractors are performing activities directly related to the main business
of the principal; or
c) The contractor does not exercise the right to control over the performance
of the work of the employees.
What will be the effect of the labor-only-contracting arrangement?
1 The subcontractor will be treated as the agent of the principal. Since the
act of an agent is the act of the principal, representations made by the
subcontractor to the employees will bind the principal.
2 The principal will become the employer as if it directly employed the
workers engaged to undertake the subcontracted job or service. It will be
responsible to them for all their entitlements and benefits under the labor
laws.
The principal and the subcontractor will be solidarily treated as the
employer. 4.The employees will become employees of the principal, subject
to the classifications of employees under Article 280 of the Labor Code.
. Is the hiring practice of repeated "5-5-5" or "endo" workers covered by DO
18-A, S. 2011?
YES.
Section 7(A)[7] makes subcontracting a prohibited activity when it is done
through repeated hiring of workers for a 5 to 6 months employment contract
under the same employer or Service Agreement of the same duration
In case of violation, the Contractors Certificate of Registration can be
cancelled, after due process, and the worker becomes regular employee of
the principal, and all benefits due to him/her shall be the liability of the
principal.
What do we mean by hiring practice of repeated "5-5-5" or "endo" workers
that are prohibited by DO 18-A, S. 2011?
The 5-5-5 or endo workers refers to the hiring practice that is deliberately
resorted to prevent workers from acquiring regular status by reason of length

of service of at least 6 months and one day. Under a subcontracting

arrangement, this is done through:
(a) repeated short-term arrangements (e.g., 5 months, 5 months, 5-5-5,
or less) by one principal through the same contractor, or under different
contractors, or
(b) repeated short-term arrangements (e.g., 5 months, 5 months, 5-5-5,
or less) through a Service Agreement of short duration under the same
contractor, or different contractors.
Jurisprudence of repeated hiring is well-settled. Repeated hiring of the same
workers shows that he/she is performing functions that is usual and
necessary to the trade or business of the employer.
On the other hand, the 5-5-5 working arrangement that is not repeated
has been declared by the SC in the Purefoods Case in General Santos, as in
violation of public policy as it has been shown to have been resorted to
prevent regular employment.
12. Will DO 18-A S. 2011, be able to address the issue of declining union
membership which has been attributed by labor groups to indirect
employment schemes such as subcontracting?
Section 8 provides that all contractors employees are entitled to all the rights
and privileges provided in the Labor Code, and set out in subparagraph (e)
the right to self-organization, collective bargaining and peaceful concerted
activities
Section 7, subcontracting is prohibited activity when it results to:(1) the
termination or reduction of regular employees and reduction of work hours or
reduction or splitting of the bargaining unit as provided in Section 7(A)[1]);
and(2) unfair labor practice (interfere with, restrain or coerce employees in
the exercise of their rights to self-organization as provided in Article 248 (c) of
the Labor Code, as amended) as provided in Section 7(A)[6].
What is the extent of the security of tenure of a contractual employee under
a subcontracting arrangement?
The concept of security of tenure is hinged on an employers regulated
right to hire and fire an employee.
The Labor Code recognizes options to terminate the employment relationship
by either the employer or the employee. Termination of employment at the
initiative of the employer must be due to just or authorized causes and with
due process. The two facets of this legal provision are: (1) the legality of the
act of the dismissal; and (2) the legality in the manner of dismissal. The
illegality of the act of dismissal constitutes discharge without just or
authorized cause; while illegality in the manner of dismissal is dismissal
without due process or notice requirement. (Articles 282, 283 and 284 of the
Labor Code, as amended)
A contractual employee works for the duration of the Service Agreement
between the principal and the contractor, unless the arrangement is divisible
into phases for which substantially different skills are required and this is
made known to the employee at the time of engagement.
24. What are the rights of a contractual employee? Is there a difference
between a regular employees and a contractual employee?
A contractors employees, whether deployed or assigned as reliever,
seasonal, week-ender, temporary, or promo jobbers, are entitled to all the

rights and privileges as provided in the Labor Code, to include:

(a) safe and healthful working conditions;
(b) labor standards such as service incentive leave, rest days, overtime pay,
holiday pay, 13th month pay, and separation pay as may be provided in the
Service Agreement or under the Labor Code;
(c) retirement benefits under the SSS or retirement plans of the contractor, if
there are any;
(d) social security and welfare benefits;
(e) self-organization, collective bargaining and peaceful concerted
activities; and (f) security of tenure.
When is the effectivity of DO18-A?
5 December 2011
(15 days after its publication in the Philippine Star on 19 November 2011)
1. Delineates service contracting/subcontracting from private recruitment
and
placement
agency
(PRPA),
by
prohibiting
contractors/subcontractors from engaging in PRPA activities and viceversa. This distinguishes a subcontractor, who should be an
independent employer, from a PRPA who merely acts for and on behalf
of an employer and not the employer of the recruited and placed
workers at a company or an employer. Thus, effectively removing one
critical source of circumvention of the Labor Code provisions.
Present condition:
The Department of Labor and Employment (DOLE) has taken the first step in
its campaign to end the practice of contractualization, popularly referred to
as endo.
Department Order No. 162, series of 2016, issued by Labor Secretary
Silvestre Bello and which took effect last Monday, directs DOLE regional
offices to stop accepting applications from new third-party service providers.
Only the 5,000 to 6,000 contractors and subcontractors already registered
with DOLE will now be allowed to operate.
All certificates of registration of contractors/subcontractors issued prior to
this Order shall be respected, Bello said in the one-page order.
- this will go after fly-by-night third party service
- Created by Presidential Decree No.442 in 1974, the Labor Code of the
Philippines does not condone labor contractualization, but the law has
some loopholes that gave birth to contractualization.
- Employers use this loophole to fire employees before their
regularization--some are fired and re-hired, some have to look for a
new company to take them in.
- Statistics show that a total of 2.73 million people or 6.6 percent in the
labor force are unemployed while 2 in every 10 employed Filipinos are
underemployed.
- Based on 2014 Integrated Survey on Labor and Employment of the
Philippine Statistics Authority on companies employing 20 or more
workers, 39 percent or 1.96 million of the total 5.06 million workers are
non-regulars.
- In 2014, the construction industry in 2014 recorded the highest share
of non-regular workers, having six non-regulars in every 10 workers. It

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is followed by agriculture, forestry and fishing industry, mining and

quarrying industry; and the accommodation and food service activities
industry; with each having five non-regulars in every 10 workers.
How do you determine if a persons services are engaged by another
as a job contractor or as an employee?
There are several tests used to determine the existence of an
employer-employee relationship. It is not necessary that all of them should be
used, though, in determining whether there exists such relationship. Among
such tests are the following:
The four-fold test
Economic reality test
Multi-factor test
Q:
What is the four-fold test?
(1) Right to hire, or to the selection and engagement of the employee.
(2) Payment of wages and salaries for services.
(3) Power of dismissal or the power to impose disciplinary actions.
(4) Power to control the employee with respect to the means and methods by
which the work is to be accomplished.
Among the elements mentioned, the power of control is usually the
most determinative of the existence of employer-employee relationship.
When it is found that the employer has control not only on the end to be
achieved, but also as to the means of achieving such end, the labor
authorities or the courts usually determine that there is employer-employee
relationship.
Q:

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What is the economic reality test?

In the economic reality test, there is a need to consider the existing
economic conditions prevailing between the parties, in addition to the
standard of right-of-control like the inclusion of the employee in the payrolls,
to give a clearer picture in determining the existence of an employeremployee relationship based on an analysis of the totality of economic
circumstances of the worker.
Thus, the determination of the relationship between employer and
employee depends upon the circumstances of the whole economic activity,
such as:
The extent to which the services performed are an integral part of the
employers business;
The extent of the workers investment in equipment and facilities;
The nature and degree of control exercised by the employer;
The workers opportunity for profit and loss;
The amount of initiative, skill, judgment or foresight required for the success
of the claimed independent enterprise;
The permanency and duration of the relationship between the worker and the
employer; and
The degree of dependency of the worker upon the employer for his continued
employment in that line of business. [See Francisco vs. NLRC, G.R. No.
170087, August 31, 2006].
Q:

What is the multi-factor test?

In the multi-factor test, both the control test and the economic reality
tests are used together to determine the existence of employer-employee
relationship.
In the United States, aside from the right of control test, there are the
"economic reality" test and the "multi-factor test." The tests are drawn from
statutes, regulations, rules, policies, rulings, case law and the like. The "right
of control" test applies under the Federal Internal Revenue Code ("IRC"). The
"economic reality" test applies to the Federal Fair Labor Standards Act
("FLSA"). The California Division of Labor Standards Enforcement ("DLSE")
uses a hybrid of these two tests often referred to as the "multi-factor test" in
determining who an employee is. [See the footnotes in Sonza vs. ABS-CBN,
G.R. No. 138051, June 10, 2004; and in Dumpit-Murillo vs. Court of Appeals,
G.R. No. 164652, June 8, 2007].
Q:
Is the contractor allowed to just supply workers who will do
the work, to the principal?
No. A job contractor is supposed to undertake the work for the
principal (utilizing his own employees), and not just supply workers to the
principal. Such kind of arrangement is considered as labor-only contracting,
which is prohibited.
Q:

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What is labor-only contracting?

There is labor-only contracting where the contractor or subcontractor
merely recruits, supplies or places workers to perform a job, work or service
for a principal, and the following elements are present:
The contractor or subcontractor does not have substantial capital or
investment to actually perform the job, work or service under its own account
and responsibility; and
the employees recruited, supplied or placed by such contractor or
subcontractors are performing activities directly related to the main business
of the principal.
Q:

What is the effect of labor-only contracting?

Any finding of labor-only contracting shall render the principal jointly
and severally liable with the contractor to the latters employees, in the same
manner and extent that the principal is liable to employees directly hired by
him/her. In such cases, the person or intermediary shall be considered merely
as an agent of the employer who shall be responsible to the workers in the
same manner and extent as if the latter were directly employed by him. Also,
a finding of labor-only contracting shall be a ground for the cancellation of
registration as legitimate job contractor with the DOLE.
If the labor-only contracting activity is undertaken by a legitimate
labor organization, a petition for cancellation of union registration may be
filed against it.
Q:
What are the other prohibited acts that may be considered as
similar to labor-only contracting?
In addition to the prohibition on labor-only contracting, Department
Order No. 18-A also declared as contrary to law the contracting out of jobs,
works or services when not done in good faith and not justified by the

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exigencies of the business, including the following:

Contracting out of jobs, works or services when the same results in the
termination or reduction of regular employees and reduction of work hours or
reduction or splitting of the bargaining unit.
Contracting out of work with a cabo, which refers to a person or group of
persons or to a labor group which, in the guise of a labor organization,
cooperative or any entity, supplies workers to an employer, with or without
any monetary or other consideration, whether in the capacity of an agent of
the employer or as an ostensible independent contractor.
Taking undue advantage of the economic situation or lack of bargaining
strength of the contractors employees, or undermining their security of
tenure or basic rights, or circumventing the provisions of regular
employment, in any of the following instances:
(i) Requiring them to perform functions which are currently being
performed by the regular employees of the principal; and
(ii) Requiring them to sign, as a precondition to employment or
continued employment, an antedated resignation letter; a blank payroll; a
waiver of labor standards including minimum wages and social or welfare
benefits; or a quitclaim releasing the principal, contractor or from any liability
as to payment of future claims.
Contracting out of a job, work or service through an in-house agency.
Contracting out of a job, work or service that is necessary or desirable or
directly related to the business or operation of the principal by reason of a
strike or lockout whether actual or imminent.
Contracting out of a job, work or service being performed by union members
when such will interfere with, restrain or coerce employees in the exercise of
their rights to self-organization as provided in Art. 248 (c) of the Labor Code,
as amended.
Repeated hiring of employees under an employment contract of short
duration or under a Service Agreement of short duration with the same or
different contractors, which circumvents the Labor Code provisions on
Security of Tenure.
Requiring employees under a subcontracting arrangement to sign a contract
fixing the period of employment to a term shorter than the term of the
Service Agreement, unless the contract is divisible into phases for which
substantially different skills are required and this is made known to the
employee at the time of engagement.
Refusal to provide a copy of the Service Agreement and the employment
contracts between the contractor and the employees deployed to work in the
bargaining unit of the principals certified bargaining agent to the sole and
exclusive bargaining agent (SEBA).
Engaging or maintaining by the principal of subcontracted employees in
excess of those provided for in the applicable Collective Bargaining
Agreement (CBA) or as set by the Industry Tripartite Council (ITC).
Contracting out of jobs, works or services analogous to the above
when not done in good faith and not justified by the exigencies of the
business.
Q:
What are the relationships created in a subcontracting
arrangement?

(1) There is an employer-employee relationship between the

contractor and its own employees it engages to perform a specific job, work,
or service being contracted;
(2) There is a contractual relationship between the principal and the
contractor as governed by the provisions of the general law on contracts.
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There are three parties involved in these arrangements; the principal

who decides to farm out a job, work or service to a contractor; the
contractor who has the capacity to independently undertake the
performance of the job, work or service; and the contractual workers
engaged by the contractor to accomplish the job, work or service.
While Endo (end of contract) or the 555 work arrangement,
wherein a worker is retrenched before being given a regular
employment status, is already illegal under the law, Baldoz explained
there are forms of subcontracting, which are considered lawful.
These legitimate independent subcontracting includes the job
opportunities for overseas Filipino workers (OFW).
It also covers those industries, which are project-based or temporary
by nature such as Business Process Outsourcing, car manufacturing,
construction, and even showbiz.

UPDATE of the current status: